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Intangible assets are non-monetary assets that cannot be seen, touched, or physically measured. Need a robust accounting system; else, operational difficulties may arise. Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. Nora O’Malley covers small business finance and entrepreneurship topics for The Balance.
What is an example of a contra account?
Within equity, an example of a contra account is the treasury stock account; it is a deduction from equity, because it represents the amount paid by a corporation to buy back its stock.
If you offer credit terms to your customers, you probably know that not all of them will pay. Creating this contra asset account builds in a safeguard against overstating your accounts receivable balance. Writing off your obsolete inventory in this manner allows you to expense the cost of the obsolete inventory while also decreasing your current inventory balance using the contra asset account. Another reason to include contra accounts on a balance sheet is to preserve the historical value of the main account. This is done by separating the decreases that have occurred in the contra account from the original transaction amount.
Maintenance of Historical Cost
A contra account is an entry on the general ledger with a balance contrary to the normal balance for that categorization (i.e. asset, liability, or equity). This type of reporting allows anyone analyzing the balance sheet to understand much more about the company and its assets than if they were to simply look at the net value of the depreciated asset. By reflecting both accounts on the balance sheet, analysts can understand both the original price and the total decrease in value of a certain asset over time.
The accumulated depreciation amount shows how much depreciation expense has been charged against an asset. Accumulated depreciation decreases the value of an asset, bringing it more in line with its market value. Put simply, contra accounts are used to reduce the normal accounts on the balance sheet. If the related account has a debit as the natural balance, then the contra account will record a credit.
Contra Asset Account
These assets represent rights to receive future payments that are not due at the balance sheet date. In accounting, notes receivables are accounts to keep track of accrued assets that have been earned but not yet received. In accounting, goodwill is the value of an asset that is considered intangible but has a quantifiable “prudent value” in a business. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.
Accumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet. A contra liability account is a liability account that is debited in order to offset a credit to another liability account. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Whenever the balance of a CA account increases , the increased amount is written off as an expense and is reported in the company’s income statement. For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.
Example Contra Account – Allowance for Doubtful Accounts
A contra account is a balance sheet account that is used to offset a related asset, liability, or equity account. Contra accounts are used to ensure the proper valuation construction bookkeeping of these items is reflected on the balance sheet. Therefore, it reduces the value of shareholders’ equity by the amount paid for those repurchased stocks.